It's not easy to answer that question. As Dan Hind says, "We have been marinading in nonsense for so long that, if someone tells you how the monetary system works, they will sound like a crank, even if what they are telling you is true."

When Occupy Darlington met on Monday 19th March in the East Hall of the Arts Centre, we tried to answer the question...

Sadly, Tony Brockley from Darlington Credit Union was unable to make it to the meeting, but our other guest, Pete Smith, was there to provide some historical and political context to the economic changes of the past few decades which have culminated in a banking collapse and now the threat of years of hardship for the 99% of people.

Appropriately for an event taking place on one of the nights that Darlington for Culture runs the Arts Centre, we had a performance of The Great Money Trick, a chapter from The Ragged Trousered Philanthropists by Robert Tressell. It went a bit like this performance which took place at Occupy London's camp...

And here's what I said:

In Darlington over the past year we have seen people come together to try to save the football club – the Supporters' Trust, a co-operative, is involved with this effort. People have responded to the threat of the Arts Centre being closed with the establishment of Darlington for Culture, which is also a form of co-operative. Friends of the Forum worked to save the Forum Music Centre on borough road, which is run by a community interest company called Humantics. And most recently, Friends of Cockerton Library have been campaigning for the future of what is a vital community hub for their village. Why are these cherished institutions and services under threat in the first place? Where's all the money gone?

We read and hear about how there's no money left. People increasingly feel they do not have the money to sustain their standard of living, however modest, because of increased costs and incomes not keeping pace. But before we ask Lenin's question “what is to be done?” – we have to ask Marvyn Gaye's question “what's going on?”

Going back to the start of the crisis – during the credit crunch of 2008, banks around the world stopped lending to each other, the cost of borrowing increased for individuals and firms, and banks required state bailouts to allow the financial system to continue operating... I'm not going to bore you with collateralised debt obligations or credit default swaps, by the way. It's enough to say that press commentators and politicians suddenly realized that far from being Geese laying Golden Eggs, the banks were sitting on bad eggs...

So the banks were bailed out by the state – propped up so the y could keep going – and shares in the banks were taken in exchange, held on our behalf by UKFI (United Kingdom Financial Investments), an arms-length holding company that the state owns but which is not directly accountable to parliament and the people.

As the recession technically ended, the richest 1000 people in the UK increased their wealth that year by almost a third, according to the Sunday Times Rich list – meaning that as the pain was continuing for the many, the boom was ongoing for the few.

Despite wage freezes for most private sector workers, or effective pay cuts as a result of below inflation rises, the top bosses in the private sector – those commanding the FTSE 100 listed firms – have seen their pay increase in double figure percentage points. Not by 10 or 20% each year, but by around 50%. Pay for the managing directors of small and medium sized business has obviously not increased by anywhere near this much.

Big corporations in the UK are sitting on £700bn of cash reserves – they won't invest because the rationale for investment is returns to capital of at least 10%. Demand is weak in existing export markets and in the home markets.

We can say for sure that four years on from the crash, the 1% – corporate and banking elites – are firmly in control. After the 2010 general election delivered a hung parliament, a hastily organised coalition between the Conservatives and Liberal Democrats was put together. The new government, with a cabinet packed with millionaires, said that there was an emergency and only a programme of severe spending cuts and tax rises would stop the UK losing it's triple-A credit rating. By cutting back spending, the confidence fairy would wave her magic wand and suddenly people would invest, economic activity would pick up, and there would be strong growth.

I think this is the biggest single lie in British politics since the claim that Iraq had Weapons of Mass Destruction available to use against us within 45 minutes. Not least because in the last 18 months, overall expenditure by the state has increased – borrowing is up. The coalition government used the Eurozone crisis – which was about states which have given up their sovereign currency to enter into monetary union – to conflate Greece, a country without fiscal autonomy or an effective system of tax collection, with the UK, a state which has its own currency an the means to collect taxes (if not the desire to collect taxes from the wealthiest).

The public debt and deficit caused by the crash are blamed for causing a crisis, instead of the banks... The argument made by the Chancellor George Osborne – that the UK has run out of money – is one of the most ignorant statements that a government minister could make. The Prime Minister almost told his party conference that people in the UK should rush to pay down their debts – ignoring the fact that our money supply is a form of debt.

This is what's known as a “fallacy of composition” – thinking that what happens at the level of the household or firm is the same as what happens at the level of the whole economy. The government, either deliberately or through ignorance, keeps falling for the paradox of thrift – arguing that because firms and households are cutting spending, that it is beneficial for the economy if the state cuts spending. But the state has ultimate control over the supply of money, so the position of the government is very different to that of a household or firm.

The issue of spending cuts is directly linked to the banks – we've been told in recent years that the banks are “too big to fail”. This isn't about success or failure, but about power – the financial elite are the dominant group within Britain's ruling class. Fifty percent of the Tory party's funding comes from financial services companies based in the City of London and politicians of all parties bow before the financial might of the City – an international tax haven and site of the last “rotten borough”, the City of London Corporation. What the Occupy movement tried to do in London was point out the atrocious situation whereby voting rights to the local authority in the City of London are given to people who work for financial institutions in the Square Mile.

So the reforms proposed by the Vickers Commission – an “independent” committee that the coalition government set up to find solutions to prevent a re-run of the banking crisis – don't go far enough. That they can't suggest changes which would stabilise the financial sector is because of the power of the City and its influence over the economics profession, and over politicians of all parties.

In order to understand the world, economists create models. These work a bit like model aeroplanes – they are constructed to resemble something much larger. So a big question is – if economists create models, how realistic are they? The answer is: not very – one researcher found that only a dozen economists had published articles in which they predicted the crash coming in 2008 and its roots in the US sub-prime mortgage market. International economic bodies like the OECD didn't factor in the activities of the financial sector into their models and were suggesting in 2007 that there was no trouble on the horizon. They don't call it the dismal science for nothing!

A famous economist called Keynes said that even people who have no time for big ideas and think they are practical are actually using the dead ideas of dead economists. He's dead, but some of those economists with their own dead ideas are alive and well, advising governments, banks and large corporations. So there is a difficulty in accurately describing the reality of our economy, how it's commanding heights now function.

The British state has bailed out the banks because they don't just make money in the way that other businesses do, they actually make money – they issue it into circulation, “print money” as it is commonly known, but they do it largely electronically through their accounting systems. Money is credit – credit comes from the Latin word “credo” meaning “trust”. That we trust money to pay for goods and services is a matter of power within society, and so it's creation and quantity should be a public concern in a democracy.

Changes in how money is supplied to the economy have not been understood by most economists, let alone the general public. Most people assume that our money is issued by the Bank of England, a public body run by a Governor and the Monetary Policy Committee – supposedly held to account by the Chancellor of the Exchequer and the Treasury Select Committee made up of MPs. This set-up of an independent central bank has become the norm in most capitalist states.

But there's two kinds of money in our economy: the notes and coins, and deposits by the commercial banks at the Bank of England, are what's known as base money. What backs up base money is the state – the power of the sovereign. We have a fiat currency – fiat means “let there be", the sovereign is saying, I call this money and will accept it as payment for taxes.

The other kind of money is issued by banks and building societies when they make loans. This is called credit money, or broad money. Bank profits come from charging interest on loans – and as they have to pay dividends, and excessive executive rewards – lending is biased towards speculation in commodity and other asset markets, such as the housing market.

We probably haven't noticed the growth in bank-issued money because we continue to use notes and coins for smaller purchases – but what matters is volume. Large payments are now made electronically and are processed with great speed – we have become accustomed to using debit and credit cards, having Direct Debits which automatically make payments from our account. More recently, we've started using online payment systems like Paypal and internet banking, where it is obviously that money is virtually transferred from one account to another.

This innovation has been positive – it is now easier to make payments. The form of these new kinds of exchange are not a problem, it is the control that should concern us.

[In the group discussion, there were questions asked, suggestions for action, and then I did my Bagpuss explanation of corporate governance...]

Let me describe a dominant way of organising working life in order to make the everyday reality much less familiar.

Think of an organisation made up of cats, dogs, and mice – ignore the fact that dogs chase cats and that cats kill mice. The cats gain from their shares if the business succeeds, but can slink away if it all goes wrong. The dogs guard and govern the business; because of their crucial role, they are handsomely rewarded – sometimes disproportionately. The mice are hired do all the work, yet the lions share of the gains from goods and services sold go to the cats, with the dogs getting thrown a juicy bonus. The cats boss the dogs and the dogs boss the mice. And though the mice do all the work, they get the crumbs and the cats get the cream.

Now, as you’ve probably already guessed, I’m talking about organisations operating in the midst of our democratic society. They’re not run by actual cats or dogs, although we do speak of fat cats and top dogs. These organisations are incorporated by law, granted the privilege of limited liability by the state. Their bottom line is not a balance of interests but a sectional interest: shareholder value, maximising the rate of return. Is this fair? Is it democratic? I don't think so.

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And neither did the 25+ people at the meeting, where there was a sense in which we needed to democratise the banking system - which clearly has an implicit state guarantee - taking action at a local level to make life better for ourselves through forms of organisation that respond to our needs as individuals for both diversity and solidarity. We have in our town mutual and co-operative enterprises which were set up and sustained by ordinary people - they serve as an example of what is possible when there are spending cuts by the central state to local authority budgets, and when credit of the big banks and investment funding of large corporations are also restricted.

From trades unionism to co-operative enterprise - from local food production, to a community currency scheme - there was a greater confidence amongst those who were new to the politics of Occupy last November, and enthusiasm from people who were at one of our meetings for the first time.

But there was also a concern for those who are most in need - from those facing cuts to pay and pensions, the loss of employment, and the hardship it brings to families, to people living with impairments and health problems. The unemployed are faced with the loss of self-esteem, the inability to earn an income - and with the new wave of workfare, the possibility of being used to undercut wages without being paid wages! The disabled are faced with a loss of support in the form of benefits and in the care and understanding of the wider population, who are encouraged to look down on those less fortunate by those more fortunate above them.

There's more than sympathy in this concern for the unemployed and disabled, of course - there's fear of having the misfortune to lose employment or the ability to work. We live in a society in which, due to the power of the 1%, the work of volunteers, carers, parents and grandparents, often goes unrewarded. I wonder if time-banking and community currencies would help to empower the 99%...

In Darlington in the last few months there have been a number of interesting initiatives in response to / relevant to "the political economy of austerity":

+ Darlington Football Club is to become a Community Interest Company after a nail-biting last-minute rescue bid prevented last rites being read by the administrator. Darlington's Labour MP Jenny Chapman deserves credit for championing of the idea that the Supporters' Trust and local business people to keep the club up and running. The hard work now begins, but as an example for other institutions in the town which face closure, this is attempt to have a community-based club offers hope. Which we need a lot of these days. Thankfully, the first tranche of shares issued have been quickly snapped up by supporters - a total of £250,000 being raised to keep the club going.

+ Humantics, a Community Interest Company which runs the Forum music venue in the town has tried to access public funds which are supposedly there to support the "big society" under the Tory-Liberal coalition, but been knocked back in one instance because it is a CIC and not a registered charity. Which, I suppose goes against the spirit of encouraging local community action - and seeing social enterprise as a verb rather than a noun. But it does show the extent to which public funding - and that means PUBLIC SPENDING is vital to the success of the community and voluntary sector.

+ Friends of Cockerton Library is a group which has been set up to prevent the closure of the village library, which is something of a community hub and is greatly valued by local residents, especially children. Their petition on the Darlington Borough Council website has drawn a significant number of signatures. The library is to remain open but with reduced hours - a tribute to the work of the Friends group. Let's hope they can build on their activities so far - which have included an event for the national day for libaries, linking the threat of closure here to other towns and cities in which library provision is under threat because of government cuts.

+ Darlington for Culture, a co-operative that was established last year to secure the future for the Arts Centre and cultural services in the borough, has expressed concern about closure plans. Cuts to the council's funding by central government led to the decision to reduce the subsidy for the Arts Centre, and Darlington for Culture took over the running of the centre for two nights a week. Now, the council plans to sell the building and use the proceeds to work towards the construction of a new Arts Centre. There have been two protests in support of the Arts Centre remaining open, both well attended and musical - timed to coincide with council meetings at which the future of arts funding was being decided.

+ Occupy Darlington, an affinity group calling for financial reform, held a few "free stalls" before Christmas. They were a stunt to raise awareness of the role of the banks in determining economic activity, and involved goods being given away to Christmas shoppers - along with "Darlos" a potential local currency. The Northern Echo covered these demonstrations - with photos and interviews with participants. Members of Occupy Darlington are holding a discussion on "Where's all the money gone?" in the garden bar of the Arts Centre on the evening of Monday 19th March - since the austerity measures (government cuts & private sector shrinkage, in other words) are linked to the financial crisis (the banking system), it's important that the 99% get to discuss the Marvin Gaye question "what's going on?" and then the Lenin question "what is to be done?".